3M Co. (MMM) reports earnings, stock plummets

3M is supposed to be a stable, diversified maker of myriad products such as the iconic yellow Post-it Notes. Consider that over the past 10-years its worst one-day stock decline was 6.8%, about the same as the worst one-day decline in the S&P 500 over the same span. Caterpillar stock (CAT), by comparison, is seen by investors as more cyclical, and the worst one-day drop for its shares is 9.2%. What’s more, 3M stock (ticker: MMM) is up 15% year to date, just a little better than the Dow Jones Industrial Average. 3M approximates the stock market.

3M slashed its 2019 earnings guidance by 11%, from about $10.60 a share to $9.50. Management plans to lay off 2,000 workers and spend money on additional corporate restructuring. The weak results have caught investors completely off guard, sending 3M stock down 10% in Thursday morning trading, to $196.95 per share.

The back story: Wall Street isn’t in love with 3M shares. Only about 37% of analysts covering the company rate the stock a Buy, about 18 percentage points lower than the average buy rating-ratio for the 30 stocks in the Dow.

The lukewarm opinion of the Street could be because 3M shares trade at about 21 times estimated 2019 earnings, a premium to the overall market. The company has a lot of exposure to China, too; about one-third of 3M sales come from the Asia-Pacific region.

Still, no one expected Thurday’s weak report. The average analyst target price for 3M stock is about $208 a share, 20 times estimated 2019 earnings. Wall Street believes 3M’s business deserves a premium valuation.

What’s new: Sales fell in all segments except in health care. Sales declined even in the consumer segment.

“We saw end-market softness in China automotive and electronics, which we have discussed throughout the quarter,” 3M management explained on the company’s earnings conference call. “We also face channel inventory adjustments, which negatively impacted several of our businesses.”

Automotive weakness in China isn’t news, but still 3M’s earnings surprised investors. Blame inventories. Channel problems mean that inventories were too high. End-market slowdowns are often exacerbated by high inventories. Customers don’t need to purchase new goods as sales contract.

Analysts also peppered management with questions about margins. It is likely automotive and electronic margins are higher than average and that demand weakness in both areas hurt operating-profit results more than the Street expected. Margin mix is a tightly guarded secret at most companies. Analyst and investors learn about mix the hard way, on days like today.

“The question now, as we see it, is how much multiple should come out,” said Gordon Haskett analyst Don Bilson. “Other than those holding the stock right now, would anyone object if MMM traded at 18x?”

It is a fair question. Bilson is a longtime investor and an event-driven analyst, looking for catalysts that can move a stock price. His question means activists aren’t likely to wade into the 3M situation until the valuation multiple drops further.

Where could the stock go? Consider a market-valuation multiple on the company’s new guidance implies $162 a share. That’s just one scenario, and the stock probably won’t reach those depths. Still, investors can expect Wall Street analysts to cut target prices. That will keep pressure on the stock for a few days.

Credit Suisse analyst John Walsh wrote that the stock could drop 5% to 10% Thursday on these results.

3M Co. shares were trading at $194.91 per share on Thursday morning, down $24.17 (-11.03%). Year-to-date, MMM has gained 3.00%, versus a 17.44% rise in the benchmark S&P 500 index during the same period.